The Big Short by Michael Lewis was published in March 2010, I was seventeen at the time and getting ready to graduate high school. I was a teenager through the darkest days of the financial crisis and paid little attention to what was happening on Wall Street. I spent my time playing baseball and Runescape.
It wasn’t until my senior year of college that I heard of Michael Lewis’ The Big Short. I was working on my capstone project about the Federal Reserve and its appropriate level of independence when I heard about The Big Short (the movie) through the Mises Institute.
I have now seen the movie three times and earlier today I finished reading the book for the first time. My mom’s fiance is the one who told me about the book. I had never read a Michael Lewis book before, but I loved the movies Moneyball and The Blind Side so on a spur of the moment trip to Barnes and Noble with my lady I decided to pick up a copy of The Big Short.
I don’t know where to begin with the book. I thought it was fantastic. It helped me understand some things that I felt were unclear in the movie. I walked away from the book a lot more knowledgeable about credit default swaps than I did the movie. I learned a tremendous amount of information about an event that unfolded during my teenage years.
I don’t feel like an expert on the matter by any means. I still have a hard time trying to tell myself X is what happened because of Y and Z. And I don’t feel I can give a good enough explanation of the events to do the book justice. It’s a lot of information to take in. And to be fair, even the guys in the book (the ones who foresaw the calamity) couldn’t explain why things unfolded the way they did. It’s tough to make sense of because it didn’t make sense. But I will give a brief rundown.
The book centers around four people who foresee the collapse of the housing market. Steve Eisman, Dr. Michael Burry, Charlie Ledley, and James Mai. Of course there are other people who play vital roles but these are our main four investors we follow in the book. Based on their knowledge of the mortgage market they see impending doom and do the unthinkable, they bet against the US housing market. And it pays off in a big way.
Of course it’s not an overnight success story. The reader follows the individual stories and battles that each
gambler investor faces. For example, Ledley and Mai start off in a garage with their own funds making low risk high reward investments. When they come across the mother of all low risk high reward investments their biggest struggle is getting the “serious” Wall Street people to give them the time of day, let alone a license to make the kind of big trades they wish to make. Dr. Burry has to fend off his howling investors when his fund, Scion Capital, begins to lose his investors money for the first time. Eisman has his own battles to fight on top of trying to figure out the right time to sell before (ultimately his own company) Morgan Stanley goes under and he loses everything.
Ultimately all four of them were asking the same question, “Why wasn’t the market responding the way it should to millions defaulting on mortgages?” The answer is fraud on multiple levels. Mortgage brokers and underwriters weren’t practicing due diligence. They were cranking out bad mortgage loans in order to have enough mortgage loans to meet the demand for mortgage backed securities which were getting deceptively high ratings from the rating agencies. Each transaction in that chain resulted in a profit for somebody so there was an incentive to keep producing mortgage loans, even if they were bad. To make things worse, the price-setters of the credit default swaps were manipulating the prices to benefit their portfolios, which meant our four investors were stuck paying premiums on their bets until the price-setters were ready to handle an honest price change.
That is a lot to take in for someone who has little or no background on the subject. And it omits a lot and skims over very important details for those who do have the knowledge. But it’s a quick summary and that’s what I was going for.
Corruption and fraud were everywhere. For anyone interested in learning more about it I highly recommend the book. It kept me interested the entire way through.
There are a lot of people in the book, and it can become difficult to keep track of who is who and works where and what they do. I would advise keeping an index of the people in the book as you go. Maybe I just felt that way because I saw the movie three times before reading the book and some of the people from the book are given different names in the movie.
Lewis does a great job telling the story of some brilliant people during one of America’s most difficult financial times. However, capitalism and greed are blamed in the book which I feel is unfair. Greed is a constant, in the good times and the bad, and cannot bear responsibility for only one. And it is hard to fault capitalism when government gave the rating agencies oligopoly power. Of course there were many other factors that contributed to the disaster. And I don’t want to get into all of them or get caught in a fierce defense of capitalism so I’ll leave it with this, The Big Short is a great book, and I highly recommend it.
Also here’s a brief Mises take on the film: Mises Review.